The Difference Between a Lease Option and a
While the two terms are often used interchangeably, a lease with the
option to purchase (a Lease Option) and a true Lease Purchase
Agreement are different agreements.
A Lease Option is a lease where the tenant has the option, but the
not obligation, to purchase the property. However, the owner is
required to sell the property if the tenant exercises their option.
This is a unilateral contract since only the owner is under an
A Lease Purchase Agreement (also known as a Lease Purchase Contract)
requires the tenant to purchase the property before the expiration
of the agreement. This is a bilateral contract since both parties
have a duty to perform. A lease purchase is typically used when
buyer cannot currently qualify for a mortgage and the definitive
goal of the parties is the eventual purchase and sale of the
Both are often confused with an Installment Land Contract (also
known as a Bond for Title or a Contract for Deed), which is a type
of owner financing where the purchaser has equitable title to the
property but legal title to the property is not transferred to the
purchaser until the purchaser has completely paid for the property. However, if properly
drafted, neither a lease option nor a lease purchase agreement are
actually owner financing. They grant the tenant a leasehold estate
only. The tenant is simply being allowed the flexibility of renting the
property until closing (or a potential closing in the case of a
terms are the same in both a lease option and a lease purchase
The term “tenant buyer” is used below,
in place of the separate terms “tenant” and “buyer”.
This is a layman’s term and is not appropriate for the actual paperwork used to create a lease
option or lease purchase agreement.
both cases there will be at least two parties: the tenant buyer
(lessee) and the landlord (lessor). In some situations there may be
three or more parties. For example, if the owner of the property has
turned the landlording responsibilities over to a property
management company. Then the tenant buyer would have a contract or
option to purchase with the owner, and a lease or rental agreement
with the management company. There also would be a property
management contract between the owner and the management company.
In both cases, the tenant buyer’s monthly rental payment may be more
than the fair market rent. This would allow a portion of the monthly
payment to be applied towards the eventual purchase of the property
or towards the down payment for a mortgage if allowed by the buyer’s
lender. However, if the tenant buyer does not purchase the property,
most lease options and lease purchase agreements clearly state that
these payments are non-refundable. In the case of a lease purchase,
the tenant buyer would actually be in default of contract for
failing to purchase the property.
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Lease Purchase Agreement